Captive shipper breakout

At the end of March, an anticipated public hearing by the U.S. Surface Transportation Board brought more than eight hours of testimony from many shippers who are trying to convince federal regulators to inject more competition into the domestic freight rail industry through a process known as “competitive switching.”
The concept of competitive switching is to allow shippers to use, on a case-by-case basis, multiple railroads when shipping freight.
About 78 percent of freight stations across the United States are captive to a single Class I railroad, according to data presented to the STB by the American Chemistry Council. The association also said there’s been a 71 percent increase in freight rates since the last railroad merger in 2001, which brought the tally of major railroads to seven, down from 26 in 1980. These increases, ACC said, came at 2.8 times the rate increases seen in the trucking industry.
ACC officials said rail freight rates are only getting worse, but parity can be accomplished both through reforms to the 1980 Staggers Rail Act and in the way STB operates.
Scott Jensen of ACC called “competitive switching” and other rulemaking opportunities as “common sense reforms that get to the state of play.”
The National Industrial Transportation League brought its competitive switching proposal to the attention of the STB in July 2011, calling for a rulemaking to amend Ex Partie 711, which would allow captive shippers to switch between Class I carriers. The group asked the STB to let shippers located within 30 miles of a working interchange, who were getting charged a 240-percent variable cost ratio by a railroad, to be able to switch to a different carrier.
According to the STB, it can allow switching “where it finds such agreements to be practicable and in the public interest, or where such agreements are necessary to provide competitive rail service.”
In a July 2012 petition for rulemaking, the STB said it can’t fully gauge the impact of such an arrangement, having no sense of how many shippers would take advantage of the benefits of switching, and how pricing would be determined. It asked for more data, setting the table for a hearing in the fall of 2013. The government shutdown forced a new timeline, and the two days of testimony and questions finally occurred in March.
Bruce Carlton, president of the NIT League, said the shipper group’s proposal was intended “to introduce a straightforward means to inject a measure of economic competition into freight rail markets that are not competitive.
“We’re not asking the board to go backward,” he said. “We’re not asking you to re-regulate the freight rail industry. We’re asking you to take a necessary step to promote genuine rail competition.”
Deep and intrusive regulations are a thing of the past. The Staggers Act, he said, has done its job in promoting the rail industry, but it needs to bring barriers regarding competitive switching down to a level that’s more attainable by captive shippers.
“We’re asking you to open the door to fair competition between healthy, financially strong Class I railroads for a captive shipper’s business where that is possible,” Carlton said.
For a shipper to engage in switching, the NIT League said it has to show there’s only one railroad option; there’s a lack of intermodal competition and there can be “a working interchange within a reasonable distance from the facility.” The railroad in question, Carlton said, can block the competitive-switching request if the proposal isn’t safe or simply can’t be done.
During questioning from STB Vice Chairman Ann Begeman at the hearing, Nicholas DiMichael of law firm Thomas Hine, which helped the NIT League present its testimony to the board, admitted the proposal will not cover all shippers, but said this was by design.
“We wanted to give you a proposal that deals with shippers who are truly captive,” he said. “Let’s not go for the world, let’s go for where there really is a problem, and we can see how that works.”
DiMichael added the proposal should be “business-friendly and quick” — not something requiring so many parts that it takes the STB years to approve each competitive switching request.
Representing the Chlorine Institute, Eddie Johnston, board committee chairman on rail issues and an employee at DuPont, supported the NIT League’s proposal, telling the STB that railroads are healthy and profitable, which comes from “improved productivity on the one hand, and virtually unrivalled pricing power on the other.”
But this increase in rail productivity has left shippers in the cold, he said. In his experience, manufacturers are paying increasing rail rates with no place to turn for alternative transport. This, he added, has meant rail-to-rail competition has nearly disappeared.
Johnston said if the STB approves competitive switching then it must be aware that the mere presence of a rulemaking doesn’t mean competition will return to the freight rail transport.
“Competitive switching agreements stop short of actually creating competition. They make competition possible,” he said.
“The mere fact that switching is offered and provides a theoretical basis for competition should not prevent a shipper from bringing a rate case to the STB,” Johnston continued, “if the shipper can demonstrate by facts and circumstances that it has no price competitive alternative through bids at lower prices.”
To get around this issue, he called on the board to place language in its final ruling that states “the theoretical ability of another competing railroad to make a competing offer would be ignored for purposes of a rate case against the incumbent railroad.”
The NIT League’s proposal, however, has its detractors.
The Association of American Railroads called it a “vague and incomplete proposal” that would hurt both passenger and freight service and slowdown capacity investments. For AAR, there are no benefits to the NIT League’s proposal.
Richard Timmons, president of the American Shortline and Regional Railroad Association, said the proposal would hurt his members because it would make their networks less efficient. This, he said, is the same basic issue Class I railroads see with competitive switching, but smaller railroads will have an even harder time recovering from problems with their own networks. While the NIT League’s current proposal would exclude smaller railroads, he called on the STB to reject the proposal anyway because of the ambiguity in its language regarding small carriers.
In a letter sent to the board before the hearing, Bill Shuster, chairman of the U.S. House Committee on Transportation and Infrastructure, and Ranking Member Nick J. Rahall urged caution in the proceedings, writing that the Staggers Act has done its job. The lawmakers said inflation-adjusted rates, on average, are down, and railroads have had the opportunity to invest in their networks. They called for continuation of the “current policy of balanced regulation by the STB that is called for in the Staggers Act.”
Noting the Department of Transportation has said freight shipments will rise by 62 percent by 2040 when compared to 2011’s numbers, Shuster and Rahall said the freight industry needs to have leeway to make needed investments in its future. (DOT stayed out of the discussion during the hearing, only stating it hasn’t made any conclusions about the legality, safety or impact to rail efficiency or investment of competitive switching. It instead offered potential origin destination pairs that would arise in a competitive-switching environment.)
“Any policy change made by the STB that decreases the railroads’ efficiency, and limits their ability to reinvest, grow their networks and meet the nation’s freight transportation demands both today and in the future will be opposed by this committee,” Shuster and Rahall wrote. The letter was also signed by Reps. Jeff Denham, R-Calif., and Corrine Brown, D-Fla., of the Subcommittee on Railroads, Pipelines and Hazardous Materials.

Slow Movement. As for the STB itself, Tom Schick, ACC’s senior director of distribution, regulatory and technical affairs, said “the agency needs to be efficient and needs to be modernized — and it’s not like there’s somewhere else you can go.
“If you don’t like your freight rates, you cannot go to court, you cannot go to a state government agency, you cannot go to another part of the federal government or the justice department saying, ‘our rates are too high,’” he told American Shipper.
Schick called the STB “a very deliberative body,” but said now is the time to move beyond talking about competition and how it might be improved to doing something about the competitive switching issue. Holding the March public hearing, he said, allowed all the various stakeholders to present their data, but with all that information, the board now has collected more than enough evidence and comments to make an informed decision.
“We do think it’s very important now to go beyond the discussion phase and into the next step of actually proposing some changes to STB’s current rules, which make competitive switching unworkable right now,” he said.
ACC’s Jensen said while competitive switching is complicated and there are numerous logistical issues to be ironed out, the nearly three-year delay from the NIT League’s proposal and the hearing has cost shippers lots of money.
“When you take a look at something like competitive switching, we really feel like that’s one of the things you can take a look at and potentially allow the market place to address these issues and head off having rate disputes go before the STB,” he said.
Jeff Sloan, ACC’s senior policy director, looked at the line of questioning during the hearing and thought the STB may have signaled a shift in its thinking. He said the board members looked at competition as something needed to be restored, adding they didn’t appear to reject the notion of competitive switching.
“I think they were intrigued by it and were kind of curious about what direction they might be able to go with it,” Sloan said.

STB Modernization. Competitive switching is just the start. The NIT League’s proposal would only apply to shippers meeting certain criteria, Sloan said, so the STB should keep looking at how to increase competition across the industry.
He said shippers served only by one railroad should have a way to get bids from competing railroads. Shippers and railroads should also be able to resolve rates through an alternate process instead of going through full litigation that takes “multiple years and multiple millions of dollars.”
Another reform gets to the heart of the board’s membership. The current setup of three STB board members — one of the positions is currently vacant — essentially inhibits discussion between them because even casual discussion or backroom meeting by definition involves a quorum. Sloan said these discussions are thus subject to open meetings laws.
“That limits their ability to work through matters that are before them,” he said. “It’s not a very efficient way to solve issues; everything has to go through staff, rather than direct communication between the people who are making these decisions.”
Schick said reforms overall will breathe new life into the Staggers Act. It needs to be updated, he added, and competitive-switching is a step in the right direction.
“What we have right now is a congressional setup that’s 33 years old, and we have a bunch of interpretations and regulations that were put in place by the STB over the years, which are, we think, outdated,” Schick said.